Model uncertainty and intertemporal tax smoothing

  title={Model uncertainty and intertemporal tax smoothing},
  author={Yulei Luo and Jun Nie and Eric R. Young},
In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model’s predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed… CONTINUE READING